Nazi Economics

Hitler, 1889-1936: Hubris, by Ian Kershaw, New York: W.W. Norton & Co., 845 pages, $35.00

Adolf Hitler was "wholly ignorant" of economics, Ian Kershaw boldly writes in his excellent new study, Hitler, 1889-1936: Hubris. What the dictator did know was politics and how to achieve public support–Hitler was an immensely popular leader with approval ratings even Bill Clinton would envy–and early on, he made it clear that economics would be subordinate to politics.

One odd result of Hitler's decision is that few of his biographers have paid much attention to his economic policies prior to the Nazis' first overt military act, the reoccupation of the Rhineland in 1936. Indeed, if they pay any attention at all to the subject, most merely accept Nazi propaganda claims of Hitler's "economic miracle" in restoring Germany's prosperity. Kershaw's book is a welcome exception to this tendency.

The general view that Germany's shattered economy surged to life in the first few years of the Nazi regime is typified by Sebastian Haffner, a German writer whose short book The Meaning of Hitler (1979) received extravagant praise in John Lukacs' recent The Hitler of History. As Haffner put it, "Among these positive achievements of Hitler the one outshining all others was his economic miracle….In January 1933, when Hitler became Reich Chancellor, there were six million unemployed in Germany. A mere three years later, in 1936, there was full employment. Crying need and mass hardship had generally turned into modest but comfortable prosperity.

"Almost equally important: helplessness and hopelessness had given way to confidence and self-assurance. Even more miraculous was the fact that the transition from depression to economic boom had been accomplished without inflation, at totally stable wages and prices. Not even Ludwig Erhard succeeded in doing that later in post-war Western Germany."

Haffner is hardly alone in his glowing evaluation of Hitler's supposed economic miracle. In his highly influential Origins of the Second World War (1961), British historian A.J.P. Taylor similarly gave the Nazis credit for creating widespread prosperity, concluding, "The Nazi secret was not armament production; it was freedom from the then orthodox principles of economics. Government spending provided all the happy effects of mild inflation; while political dictatorship, with its destruction of trade unions and rigorous exchange control, prevented such unfortunate consequences as a rise in wages, or in prices."

Kershaw's version of things more accurately reflects what was really happening in Germany from 1933 through 1935. Hitler's economic policies were systematically wrecking the German economy and were rapidly painting him into a corner where his only choices were war or a loss of power.

Hitler, argues Kershaw, was deathly afraid of inflation and a repetition of the early 1920s. Nevertheless, he had to reduce unemployment or he wasn't going to last long enough to begin rearming Germany, a public goal of his since the '20s. Increasing exports was not a possibility since, unless the German government devalued the mark (as Britain had done with the pound and the United States with the dollar), German exports couldn't compete in a way that would add new jobs or bring needed foreign exchange. Hitler nixed devaluation because he thought it was a step on the road to inflation. Tax cuts were also out of the question because he believed they led to less revenue not more growth.

Hitler's solution for both the rearmament and unemployment problems was the same: massive deficit spending. In fact, by Kershaw's account, the Nazi government guaranteed some 35 billion ReichMarks to the German armed forces alone over an eight-year period, along with massive road building, subsidies to the auto industry, lots more bureaucrats to enforce all the new controls and regulations, and bribes to women to get married and stop working.

Did such policies reduce unemployment from 6 million in 1933 to 1 million three years later? Not exactly. Statistics from Dan Silverman's Hitler's Economy (1998) show that unemployment was reduced in Germany from 34 percent or about 6 million people, in January 1933, to 14 percent, or 2.5 million people, in January 1936. That's a dramatic reduction, to be sure, but hardly full employment. Even the 2.5 million number is extremely unreliable, as Stephen Roberts, an economic historian at Australia's University of Sydney who lived in Germany in the mid-'30s, explained in his 1937 work, The House That Hitler Built.

The "official statistics naturally tell only part of the story," wrote Roberts. "They do not take into account the Marxians, Socialists, Jews and pacifists who have lost their jobs and are cut off from relief; such persons do not appear in the official figures of unemployment. The refugees are ignored. In addition, at least a million people have been absorbed in the army, the labour-service camps, the Nazi organizations, and various partly-paid forms of labour on public works. Half a million women have been taken off the labour market in the last four years by means of the marriage allowance paid by the Government to entice them away….What they have done has been to introduce a series of emergency steps which have drastically reduced the number of unemployed; but such steps, by their very nature, are in many cases temporary. On the other hand, the reduction [in unemployment], however artificially it may have been achieved, has had a tremendous propaganda value for the Government, and there is the fixed belief of most Germans today that Hitler has achieved wonders in providing employment."

Hitler paid for his economic "miracle" partly by depleting his nation's gold reserves, which he used to import critical raw materials for the manufacture of weapons. When he took office, the Reichbank had reserves totaling 937 million ReichMarks; four years later, that figure was down to only 72 million ReichMarks. Massive government borrowing financed the rest of the government-driven economy. As Roberts put it, "The Nazi state is being financed by short-term [90 day] loans–up to 15 billion Reichmarks by the end of 1936….In short, Germany is going round and round. She can get nowhere until she returns to normal economic conditions, but she is afraid to try and get back to those, because she fears economic collapse and social upheaval if she does so."

Kershaw makes the same point and suggests that it was this fear of social unrest, heightened by serious food shortages in Germany during the fall of 1935–themselves largely the result of government policies–that played the major role in Hitler's decision to reoccupy the Rhineland in March 1936. Keep in mind that Hitler's reoccupation of the Rhineland was considered one of his "brilliant" strokes precisely because it was so unexpected–Germany was unprepared militarily or economically to carry out any extended effort in support of what even Hitler conceded to intimates was nothing more than a bold bluff.

Conventional wisdom holds that Hitler moved on the Rhineland when he did because the world was distracted by Mussolini's invasion of Abyssinia. Kershaw allows that motive as a contributing factor but contends that turmoil in Germany occasioned by the food shortages is the real key to the timing of such a risky initiative. Indeed, he argues that Hitler invaded precisely because he knew it would be extraordinarily popular within Germany and divert public attention from his domestic difficulties.

Contrary to A.J.P. Taylor, by late 1935 Germany was experiencing anything but the "happy effects of mild inflation" and "freedom from orthodox principles of economics." As Kershaw writes, "A summary of price and wage levels prepared for Hitler on 4 September 1935 showed almost half of the German work-force earning gross wages of 18 ReichMarks or less per week. This was substantially below the poverty line…Wages, then, remained at the 1932 level–substantially lower than the last pre-Depression year of 1928 in the much-maligned Weimar Republic. Food prices, on the other hand, had risen officially by 8 per cent since 1933. Overall living costs were higher by 5.4 per cent. Official rates did not, however, tell the whole tale. Increases of 33, 50, and even 150 per cent had been reported for some foodstuffs. By late summer, the terms `food crisis' and `provisions crisis' were in common use."

These facts were well known at the time, both within and without Germany. Roberts and others had written about them, attributing the food shortages to Hitler's centralized agricultural policy, which had virtually eliminated food imports while implementing government controls. The predictable result: Germany produced less food, causing both shortages and price increases. According to Roberts, wheat went up 15 percent, eggs 50 percent, butter 40 percent, potatoes 75 percent, and most meat 50 percent–all despite "official" and ineffectual price controls which Hitler for appearances' sake refused to lift. Well into Hitler's "miracle," Kershaw notes, "poor living-standards, falling real wages, and steep price increases in some necessities…[were] the dismal reality behind the `fine facade of the Third Reich.'"

At the same time, a ferocious economic policy battle was being waged over foreign exchange reserves: Should they be used to buy food imports or raw materials for armament production, the latter being Hitler's primary purpose since he first took office? Hitler appointed Hermann Göring (who knew less about economics than Hitler) to mediate between Economics Minister Hjalmar Schacht, who wanted to purchase raw materials for armaments, and Agriculture Minister Walther Darre, who wanted food to cover up his failed policies. Schacht, a social friend of Göring's, expected a rubber stamp in favor of raw materials for arms. To everyone's surprise, except Hitler's, Göring chose food, an answer that set Germany on the road to foreign conquest.

As Kershaw sees it, Hitler gave priority to food imports because the "immediate prime need was to avoid the damaging psychological effects of the only alternative: food rationing." But this decision, in turn, adversely affected German rearmament. "By early 1936," says Kershaw, "available supplies of raw materials for rearmament had shrunk to a precariously low level. Only one to two month supplies were left. Schacht demanded a slow down in the pace of rearmament….As Hitler entered his fourth year as Chancellor, the economic situation posed a real threat to rearmament plans. At the very time when international developments encouraged the most rapid expansion possible, the food crisis–and the social unrest in its turn–was sharply applying the brakes to it….Any slow down in rearmament…would inevitably bring increased unemployment in its train…[Hitler] saw this as all the more reason to hasten expansion to gain `living-space.'"

In other words, if Hitler had to spend foreign exchange reserves for food to keep the people happy, he would have to get the raw materials for armaments by taking them. Otherwise, there would be more unemployment when the arms workers were laid off due to a lack of raw materials. Hitler knew he couldn't survive both food shortages and a resurgence of unemployment.

Commenting in early 1937 on Göring's Four Year Plan for economic self-sufficiency, Roberts had presciently predicted the inevitability of either war or Hitler's fall from power. "There are 34 vital materials without which a nation cannot live, and unfortunately, Germany is worse off than any other great state insofar as these are concerned," he observed. "Whereas the British Empire is largely dependent on outside sources for only nine of these, Germany has only two in ample quantities–potash and coal. That means she must turn to the foreigner for all of her supplies of 26 of these and for part of six more. Yet this is the Power that sees fit to launch a plan for complete self sufficiency. It is ludicrous, unless she looks forward to obtaining control of the vast raw materials of central Europe or the lands beyond the Ukraine by some adventurous foreign policy….That is [Hitler's] basic dilemma. If he persists in the [economic] policies he has enunciated, he plunges Europe into war; if he abandons them, he can no longer maintain his position within Germany."

It's not that Hitler lacked contrary advice. Kershaw tells us that in October 1935 Price Commissioner Carl Goerdeler sent Hitler in October, 1935, "a devastating analysis of Germany's economic position." According to Kershaw, Goerdeler "favored a return to market economy, a renewed emphasis upon exports, and a corresponding reduction in the rearmament drive–in his view at the root of the economic problems….If things carried on as they were, only a hand-to-mouth existence would be possible after January 1936." But Goerdeler was ignored and later dismissed. Instead, Germany reoccupied the Rhineland, to widespread popular acclaim, and Göring unveiled his Four Year Plan, putting the economy firmly on a war footing.

Hitler himself apparently never had a clue that the economic policies he had followed for the first three years of his regime were responsible for his production problems. By 1936, Kershaw makes clear, Hitler believed his own press clippings regarding his economic acumen. Thus, for Hitler, the food crisis only confirmed his preconceptions. In the secret memorandum on which Göring's Four Year Plan was based, Hitler wrote, "We are overpopulated and cannot feed ourselves from our own resources. The solution ultimately lies in extending the living space of our people, that is, in extending the sources of its raw materials and foodstuffs." That is, the problem is not my fault and the answer is war, not economic reform.

Hitler's fears of losing power were not without foundation. His great nemesis, the Soviet Union, found that out 50 years later. In the 1980s, it could not keep up with increased U.S. defense spending and sustain what William E. Odom in The Collapse of the Soviet Military (1998) terms "a permanent war economy" in which 20 to 40 percent of the gross domestic product went to the military. The Soviets faced the same choice as Hitler: economic reform or war? Thankfully, the Soviet leaders chose economic reform, even though it didn't save them or their regime. Freeing yourself from orthodox principles of economics can be a tricky thing.

Contributing Editor Michael McMenamin ([e-mail]) is a lawyer in Cleveland and a regular contributor to Finest Hour, the quarterly journal of the Churchill Center. Additional research for this review was provided by Patrick McMenamin, a history major at the University of Rochester.